Lower-tiered excess insurer owes duty to a higher-tiered excess insurer
A lower-tiered excess insurer owes a duty to a higher-tiered excess insurer to engage in meaningful settlement negotiations if the lower-tiered excess insurer had substantial control over the litigation over the suit at issue.
An elevator at a Central Illinois Public Service Company (CIPS) power plant in Newton, Illinois, dropped 15 floors, injuring 23 boilermakers inside. CIPS and Dover Elevator Company (Dover) were defendants in suits brought by the boilermakers. The parties in this appeal are excess insurers of CIPS.
CIPS filed an action for declaratory judgment seeking the resolution of insurance coverage by several insurers for the accident. American International Specialty Lines Insurance Company (AISLIC), a higher-tiered excess insurer, filed a counterclaim against Great American Assurance Company (Great American), a lower-tiered excess insurer, alleging negligence and bad faith in the settlement process.
The court reviewed (1) whether a lower-tiered excess insurer owes any duty to a higher-tiered excess insurer to engage in meaningful settlement negotiations and (2) whether an underlying insurer still owes that duty if it could not settle the matter within its own policy limits.
The court looked to Liberty Mutual Insurance Co. v. American Home Assurance Co., 348 F. Supp. 2d 940 (N.D. Ill. 2004), the only case to tackle the issues of the duties of an underlying excess insurer applying Illinois law. The court also looked to Schal Bovis, Inc. Schal Bovis, Inc., 314 Ill. App. 3d at 564, 732 N.E.2d, which found that a primary insurer owed a duty to the excess insurer through equitable subrogation if the excess insurer had substantial control over the litigation.
This is because of the existence of a three-way relationship between the policyholder, the primary insurer, and the excess insurer. This relationship creates reciprocal duties of care in the conduct of settlement negotiations; when a claim threatens to exceed the primary coverage. There is a possibility that the claim may reach the excess policy which creates a three-way duty of care to act reasonably and in good faith in settling meritorious claims within the policy limits.
In the present case, if Great American had substantial control over the litigation, it owes a duty to AISLIC, a higher-tiered excess insurer, to engage in meaningful settlement negotiations. As Great American’s control over the litigation was not established at trial, the case was remanded.
